Employers have heard that the Fair Labor Standards Act (FLSA) changed on 7/1/2024. However, most do not know what that means for their organization? Correctly classifying an employee within an organization as exempt or nonexempt is often something that is overlooked. While misclassifying employees is relatively common among many organizations, it poses a significant risk to employers in the form of costly fines, negative exposure, and time-consuming law suits. The following is in-depth information on how to correctly classify employees under the FLSA and includes both the new changes effective 7/1/2024, and the upcoming changes on 1/1/2025.
An employee who is exempt is one that primarily performs work that is not subject to the overtime provisions of the Fair Labor Standards Act (FLSA). In other words, an exempt employee is “paid to get the job done” and is paid the same amount each pay period, regardless of how many hours they work per week. Nonexempt employees, on the other hand, are paid for every hour that they work and are subject to the FLSA’s minimum wage, the federal minimum wage is $7.25 per hour, and overtime pay requirements. Therefore, an employee that is classified as nonexempt must be paid overtime equal to one and one-half times their regular rate of pay for all hours worked over 40-hours in a workweek in accordance with the FLSA. The FLSA does not require that overtime be paid to nonexempt employees for hours worked in excess of eight-hours per day or on weekends or holidays. However, some states do require this, so employers need to make sure that they research and review the requirements of those states where their employees work and reside.
As previously stated above, when an employee is properly classified as exempt under the Fair Labor Standards Act (FLSA), they are exempt from the FLSA’s minimum wage and overtime pay requirements. But how does an employer determine whether an employee qualifies to be classified as exempt in the first place? The employee must “pass” two tests; the salary basis test, and a duties test. If an employee does not pass both tests then they must be classified as nonexempt in accordance with the FLSA.
Salary Basis Test
The salary basis test may be determined by using the following table:
Some exceptions to the above include the following:
- Computer professionals, which will be defined later in this article, and who earn at least $27.63 per hour, are exempt if they customarily and regularly perform all of the duties under the computer exemption, and earn at least $844 per week ($43,888 annually) paid on a salary or fee basis for the remainder of 2024.
- Alaska, California, Colorado, Maine, New York, Washington, and Wisconsin have differing thresholds.
- Elected officials of a government entity are completely exempt from the Fair Labor Standards Act (FLSA).
Duties Test
The duties test is where things tend to get tricky for employers who are working to correctly classify their employees under the Fair Labor Standards Act (FLSA). Under the duties test, the FLSA outlines specific exemptions under which a position may be classified as exempt. The exemptions and each requirement include the following:
- Executive Exemption:
- The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise; and
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
- Administrative Exemption:
- The employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the organization or the organization’s customers; and
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to “matters of significance” for most of their job.
- With regards to “matters of significance” under the administrative exemption,factors to consider in determining whether something is a “matter of significance” include the following:
- Whether the employee has authority to formulate, affect, interpret, or implement management policies, or operating practices.
- Whether the employee carries out major assignments in conducting the operations of the business.
- Whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business.
- Whether the employee has the authority to commit the employer in matters that have significant financial impact.
- Whether the employee has authority to waive or deviate from established policies and procedures without prior approval.
- Whether the employee has authority to negotiate and bind the organization on significant matters.
- Whether the employee provides consultation or expert advice to management.
- Whether the employee is involved in planning long-term or short-term business objectives.
- Whether the employee investigates and resolves matters of significance on behalf of management.
- Whether the employee represents the organization in handling complaints, arbitrating disputes, or resolving grievances.
- With regards to “matters of significance” under the administrative exemption,factors to consider in determining whether something is a “matter of significance” include the following:
- Learned Professional Exemption:
- The employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. Examples may include: doctors, teachers, attorneys, etc.
- Creative Professional Exemption:
- The employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, or physical work. Examples may include: musicians, artists, sculptors, etc.
- Computer Exemption:
- The employee’s primary duty must consist of the application of systems analysis techniques and procedures, including consulting with users to determine hardware, software, or system functional applications; or design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or a combination of duties described above to which the performance of the duties requires the same level of skills; and
- The employee must be a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field.
- Outside Sales Exemption:
- The employee’s primary duty must consist of making sales, or obtaining orders or contracts for services, or for the use of facilities for which a consideration will be paid by the client or customer; and
- The employee must also be customarily and regularly engaged away from the organization’s place, or places of business.
- Highly Compensated Employees (HCEs):
- Highly compensated employees (HCEs) are exempt if they customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or learned or creative professional employee and have the primary duty of performing office or nonmanual work. Note: California and New York do not allow employers to classify employees as HCEs.
If an employer determines that an employee earns at least the minimum of the salary duties test threshold as stated in the table above and is able, in good faith, to state that the employee meets the requirements of one of the exemptions as stated above, then the employee may be classified as exempt from overtime under the Fair Labor Standards Act (FLSA). If there is any doubt that an employee’s duties fall under one of the exemptions, it is best practice to either consult an employment law attorney or HR consultant who specializes in the FLSA to seek their expert opinion, or err on the side of caution and classify the employee as nonexempt. Remember, the employee must pass both the salary basis test and the duties test to be classified as exempt under the Fair Labor Standards Act (FLSA).
Some employers classify employees as salaried nonexempt. While there is a small provision in the Fair Labor Standards Act (FLSA) deeming this as permissible, employer’s need to be extremely careful when using this classification. The definition of salaried nonexempt is an employee who receives a fixed salary each pay period, but is also entitled to overtime pay and minimum wage. Thus, the employee is considered nonexempt in accordance with the regulations of the FLSA. The fixed weekly salary must equate to at least minimum wage, which varies from state to state, for all hours worked. The Department of Labor (DOL) Wage and Hour Division explains that this is an extremely rare situation and emphasizes that employers are required to the same recordkeeping requirements under the FLSA for nonexempt employees and must track and record all actual time worked by the salaried nonexempt employee. The DOL cautions that paying an employee the same fixed amount of money each week poses some administrative issues, and if hours worked are not tracked appropriately that it could create a legal issue as technically employees need to be paid for all hours worked even if the fixed weekly amount is or is not met. Classifying an employee as nonexempt thus having an hourly wage, and not as salary nonexempt, is a much cleaner way for employers to make sure that they are paying for all hours worked and for paying overtime for all hours worked over 40 in a workweek, or in accordance with state laws.
It is a common mistake for organizations to misclassify employees under the FLSA. Unfortunately, all it takes is one upset employee to file a complaint with the Department of Labor (DOL) Wage and Hour Division to raise the red flag. This may ultimately result in mandated back pay not only to the employee who filed the complaint and those who are currently working for the organization, but also to other employees who were misclassified and are no longer working for the organization. Employers should take the time to audit their current employee classifications by utilizing the previously described methods under the FLSA. Doing so may help the employer to avoid costly fines, negative exposure, and time-consuming law suits in the long run.
As with many employment laws, many states have passed laws that go above what the federal law states. So, employers are encouraged to research and review each individual states law as they relate to the Fair Labor Standards Act (FLSA).
For additional information on the classifying employees correctly under the FLSA, please contact us at www.NewFocusHR.com
Written by: Kristen Deutsch, M.B.A., CCP
President
07/05/2024
